Foxg1 is required for development of the ventral telencephalon in the embryonic mammalian forebrain. Although one existing hypothesis suggests that failed ventral telencephalic development in the absence of Foxg1 is due to reduced production of the morphogens sonic hedgehog (Shh) and fibroblast growth factor 8 (Fgf8), the possibility that telencephalic cells lacking Foxg1 are intrinsically incompetent to generate the ventral telencephalon has remained untested. We examined the ability of Foxg1−/− telencephalic cells to respond to Shh and Fgf8 by examining the expression of genes whose activation requires Shh or Fgf8 in vivo and by testing their responses to Shh and Fgf8 in culture. We found that many elements of the Shh and Fgf8 signalling pathways continue to function in the absence of Foxg1 but, nevertheless, we were unable to elicit normal responses of key ventral telencephalic marker genes in Foxg1−/− telencephalic tissue following a range of in vivo and in vitro manipulations. We explored the development of Foxg1−/− cells in Foxg1−/− Foxg1+/+ chimeric embryos that contained ventral telencephalon created by normally patterned wild-type cells. We found that Foxg1−/− cells contributed to the chimeric ventral telencephalon, but that they retained abnormal specification, expressing dorsal rather than ventral telencephalic markers. These findings indicate that, in addition to regulating the production of ventralising signals, Foxg1 acts cell-autonomously in the telencephalon to ensure that cells develop the competence to adopt ventral identities.